Dollar holds gains as uncertainty weighs on market sentiment

TOKYO (Reuters) – The U.S. dollar held on to gains against most currencies on Wednesday as renewed questions about a coronavirus vaccine and lack of an agreement on additional U.S. fiscal stimulus prompted a shift to safer assets.

FILE PHOTO: U.S. dollar notes are seen in this picture illustration taken at the Bank of Taiwan in Taipei November 11, 2010. REUTERS/Nicky Loh

The yuan was little changed versus the dollar after the central bank’s daily fixing of the yuan’s mid-point was largely in line with estimates, suggesting authorities have paused their attempts to rein in the currency.

The euro and British pound are likely to extend declines, analysts said, as a return of restrictions on economic activity in Europe and Britain to battle a second wave of coronavirus infections unnerves investors.

Currency moves, however, are likely to be subdued as the U.S. presidential election looms on Nov. 3, but analysts said sentiment is leaning against riskier bets, which should support the dollar in the coming days.

“Many factors are pointing to more upside for the dollar,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

“U.S. stimulus may not come until after the election. The People’s Bank of China is halting the yuan’s rise. There’s no reason to buy the euro, and there are a lot of euro longs that need to be unwound.”

The dollar last stood at $1.1744 per euro EUR=D3, holding on to a 0.6% gain from the previous session.

The pound GBP=D3 traded at $1.2932, nursing a 1% loss from Tuesday.

Sterling also took a hit due to worries about little progress in trade talks between Britain and the European Union and the chance the Bank of England will adopt negative interest rates.

Risk appetite has weakened after Johnson & Johnson JNJ.N said on Tuesday it is pausing a clinical trial of a coronavirus vaccine and Eli Lilly and Co LLY.N also said it paused a coronavirus antibody treatment.

Hopes are fading that U.S. Republicans and Democrats will reach a compromise on a new round of fiscal stimulus, which would deal a blow to the economic outlook.

Both developments are supporting the dollar, traders said.

The onshore yuan CNY=CFXS last traded at 6.7422 per dollar. On Monday the yuan posted its biggest daily fall in seven months after the central bank cut foreign exchange forward reserve requirements, which makes it cheaper to short the currency.

The Australian dollar AUD=D3 was little changed in early Asian trade but is likely to add to its 1% decline on Tuesday due to concern about a row with Beijing over coal imports, traders said.

Across the Tasman Sea, the New Zealand dollar NZD=D3 edged higher against its U.S. counterpart.

Reserve Bank of New Zealand Assistant Governor Christian Hawkesby said on Wednesday that some economic data have surprised to the upside.

But he also said the central bank’s discussion of negative interest rates is “not a game of bluff”.

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